By Dr. Peter Göpfrich
AHK in the United Arab Emirates

Download article as PDF 

The political events in the Middle East in the context of the “Arab Spring” are also generating new legal aspects and challenges for doing business in the region.

Politics in the Middle East

The MENA-Region was, due to its political, economic, legal and cultural peculiarities, never quite an easy playing field for foreign companies, especially not for SMEs. Nevertheless, for many decades they operated by and large in a relatively stable environment wherein an insider was able to navigate reasonably and safely. All this has changed since the protests of 2011 in Tunis and Egypt have ignited a process toppling autocratic heads of states (Tunis, Egypt, Libya, Yemen), civil war breaking out (Libya, Syria, Yemen), and ultimately even existing geographical boundaries of states might be changing in the process (Syria, Iraq, Libya, Yemen) and new states (Kurdistan) as well as quasi-states (Islamic State/ IS) might be emerging. This process, perhaps better described as “Arabellion” rather than the largely discredited original “Arab Spring”, might not even stop at the—albeit historically somewhat artificial—borders of the Gulf Cooperation Council’s monarchies in the Arab peninsula that have been largely unaffected so far by the changes and upheavals in their neighborhood. At least some of them, in the long, might not be able to immunize their populace (especially the young generation) against the appeal of political and institutional change with financial largesse.

Legal impact on doing business in the Middle East

The Arabellion has already made an impact on some legal issues with practical consequences for doing business in the region as well. Some of these issues have already been debated in International Arbitration Tribunals or—as the issue of “force majeure”—have an impact on the interpretation of ongoing contracts or the drafting of new contracts. Other legal issues are still pending in the future, however, possible pitfalls should already be considered at the present time, well in advance.

Investment protection

This is an important feature in international business, especially in times of political change. Even before the Arabellion, the Middle East provided a good example of the need for investment protection. A change of government may result in review or even cancellation of contracts, concluded by the former government; constitutions, laws regulations and practices may change abruptly without previous notice and without intention of any kind of compensation; even privatizations may be rescinded years after initial implementation. However, not only changes and disruptions on the government and state level may invoke the need for investment protection. The disruption of infrastructure, transport or supply lines or internal riots, demonstrations, closures or boycotting measures by a local workforce or incited populace may impede the proper execution of a contract or the proper implementation of an investment project as well. Such impediment of the fulfillment of investment contracts—or even in some cases normal commercial contracts—may amount to an investment issue according to bilateral investment treaties (BITs) or international investment conventions. The most important and widespread of these is the International Convention on the Settlement of Investment Disputes (ICSID). Some cases have already been forwarded to an ICSID—effectively an arbitration tribunal—where the underlying reasons are related to political changes in the course of the Arabellion. A case in point for this is the post-revolutionary Egypt, a country that has experienced two “revolutions” since 2011. The first involved the toppling of the former longstanding President Hosny Mubarak and was followed by the deposition of his successor Mohammed Morsi by the chief of staff, Abd el-Fattah as-Sisi, who, albeit legitimized in the interim by a popular presidential election, bases his extensive power mainly on the support of the Egyptian army. Several claims by investors against the Arab Republic of Egypt (ARE) were brought in front of an ICSID arbitral tribunal. A few have already been decided, yet most are still pending. Some of these cases deal with important issues and topics of international investment arbitration as developed and elaborated over the last decades. For instance, some cases deal with the question of “unlawful expropriation”, that is, whether an investor can challenge those acts whereby the new (post-revolutionary) government has cancelled or reversed certain investment projects that were initiated and concluded under the tenure of the former government. The root of these cases is the tension between legal certainty for foreign investors through bilateral investment treaties and the reforms measures taken by the new government after the “revolution”. For instance, a very prominent case concerns the cancellation of a politically sensitive deal for delivery of gas to Israel, signed under the former Mubarak-regime with a private consortium.

The new Egyptian government cancelled the contract because it was of the opinion that the gas price fixed in the contract was by far too low and had been concluded at great detriment to the
Egyptian state. For the investor (the claimant in this case) this cancellation amounted to an unlawful expropriation according to the applicable BIT as well as according to ICSID (the cases referred to here are published under the following website: https//icsid.worldbank /apps/ ICSIDWEB /cases). In another case, the claim of an Indonesian investor relates to an Egyptian court decision that has annulled the acquisition of a textile company that the investor (claimant) had acquired through a privatization scheme. According to the previous decision of an Egyptian court, this privatization was illegal because the state assets were offered for an allegedly politically motivated cheap price to cronies of former President Hosny Mubarak (Ampal-American Israel Corporation and others v. Arab Republic of Egypt, ARB /12/11, May 23, 2012). Similar cases, dealing with claims of unlawful expropriation concerning oil operations and exploitation services or the acquisition of shares, are pending in front of ICSID arbitration tribunals against the state of Tunis and Oman. A very interesting case before an ICSID arbitration tribunal claims that Egypt improperly overturned a land purchase deal authorized by the previous regime. This case, still pending, is of special legal interest insofar as it also deals with allegations of corrupt dealings by the investor (the claimant) with the former regime. In 2011, that is, one year before the ICSID case was registered, an Egyptian court had sentenced the investor (claimant), a businessman from the UAE, to five years in prison and a fine of over $45 million for acquiring land for the development a luxury resort from Egypt’s ex-president Hosni Mubarak at below-market prices. This case touches the famous “estoppel” doctrine that is a central pillar of international investment arbitration (Hussain Sajwani, Damac Park Avenue for Real Estate Development S.A.E., and Damac Gamsha Bay for Development S.A.E. v. Arab Republic of Egypt, ARB/11/16). The arbitration tribunal will have to deal with the question as to whether a state can invoke an investor‘s corruptive conduct when state organs played a part or knew about the illegality and nevertheless accepted it (“estoppel”). In a former ICSID case, the arbitration tribunal stated that the principle of fairness should prevent the government from raising violations of its own law as a jurisdictional defense when it knowingly overlooked them and…endorsed an investment that was not in compliance with its law (RDC v. Guatemala, Second Decision on Objections to Jurisdiction, ICSID ARB/07/23, 18 May 2010, para. 146). As in the aforementioned cases concerning “unlawful expropriation” or the impact of the “estoppel principle”, there are also a number of many other important principals of international investment laws as elaborated especially by ICSID arbitration tribunals that will be applied and possibly further developed in the pending ICSID cases related to Arabellion issues in Egypt or other Arab states. Among these is the question whether or not an investment is excluded from the scope of the BIT protection if it does not comply with national law of the host state. In this regard, a former ICSID arbitration tribunal did not rule in favor of the claim of the investor, stating that “…nobody can benefit from his own wrong – understood as the prohibition for an investor to benefit from an investment effectuated by means of one or several illegal acts” (Inceysa Vallisoletana S.L. v. Republic of El Salvador, Award, 2 August 2006, ARB/03/26, paras 231, 240 ff.). Another core issue of international investment law to be dealt with in some ICSID cases against Egypt and other “Arab Spring states“ is the question as to whether or not the applicable BIT or the ICSID convention provides full protection of investments not only against violence by state organs, but also against violence stemming from non-state actors. In a former case of a private investor (Wena Hotels) versus the state of Egypt, the arbitration tribunal stated: “The tribunal agrees with Wena that Egypt violated its obligation to accord Wena’s investment full protection and security; there is substantial evidence that Egypt was aware of (the employees of) EHC’s (a private company) intentions to seize the hotels and took no actions to prevent EHC from doing so. Moreover, once the seizures occurred, both the police and the Ministry of Tourism took no immediate action to restore the hotels promptly to Wena’s control” (Wena Hotels v. Egypt, Award, 8 December 2000, 41 ILM 896 (2002), para. 84). Other core issues of international investment law will inevitably emerge with political and military developments. As for Syria, Iraq or Libya, for example, the question as to whether or not armed conflicts will affect the continued application of bilateral investment treaties will prove relevant—according to the UN ILC Draft articles “not ipso facto…”—or whether or not the conduct of an insurrectional movement shall be considered an act of the state. According to the UN ILC draft articles, the answer is yes when the insurrectional movement becomes the new government of the state or it can establish a de facto state, and the answer is no when the insurrectional movement is ultimately unsuccessful.

Force majeure

The current situation in some parts of the Middle East is not only relevant with respect to the field of public or private international law or the field of investment treaties, where a state or state entity is involved on at least one side of the conflict. There is also a host of issues that can impede proper execution of private commercial contracts, and certainly the question of force majeure is at the forefront of these. Companies may be forced to repatriate workers due to civil or military unrest, work may need to be suspended, delayed or completely abandoned. In normal circumstances, delays or other impediments to performance can give rise to claims for damages for breach of contract. In circumstances where it is claimed that the cause of the delay was either unforeseeable or beyond the control of the parties, a right to recover damages may not arise. With respect to the definition or repercussions of force majeure, most of the Arab states follow the Egyptian civil law that is inspired by French Civil Law principles. According to these principles, a differentiation has to be made between “impossibility” (an extraneous event that makes performance of contractual obligation impossible, that renders the obligation suspended -Art. 373 EGY Civil Code) and “imprevision” (an extraneous event that makes performance of contractual obligation onerous and in such case a judge can amend the contract to restore the contractual balance (Art. 147 EGY Civil Code). In both cases, exceptional circumstances of general application (revolution, war, civil war, strike, power cuts, currency restrictions, etc.) are required that were not foreseeable when the contract was made. In English law, force majeure is essentially a creature of contract and thus— unlike the continental civil law tradition where a general clause can give a wide flexibility for reasoning and interpretation—the wording of such a clause in the contract is key and needs to be considered carefully. It will therefore vary in meaning and scope depending on the particular wording used in each case. Generally, force majeure will be defined by reference to events that are beyond a party’s reasonable control and
may be limited to a specified category or list of events (such as war, acts of God or natural disasters, for instance). For example, an act of terrorism is not considered an act of war and therefore would not excuse a delay in performance under force majeure wording that only covers acts of war. Moreover, the party seeking to rely on the clause must demonstrate that it has taken all reasonable steps to avoid or at least mitigate the effects of the disrupting event and has in turn complied precisely with the prescribed notice requirements. The difference between civil law tradition and common law tradition can lead to different rulings, as can be seen in the example of recent cases in Iraq, especially regarding contracts with the government, public sector entities or state-owned companies. In most Arab countries, such contracts are governed by special regulations that define force majeure according to the continental European civil law tradition. In Iraq, contracts entered into by the government and most public entities are subject to a specific public government contracts law. This law requires that the disrupting event be unforeseeable to the party invoking force majeure. The application of this law has recently created some problems to the extent that some parties incorporated clauses into their contracts that expressly recognized the security situation as it then existed. Iraqi courts held, in some cases, that security problems in the country cannot be considered unforeseeable and that parties take on this risk when they enter in contracts in the Iraqi market. Therefore, a party was not entitled to rely upon security risks as an excuse for the disrupted or delayed implementation of a contract.

Other current and future legal issues

Apart from the predominant issue of force majeure, there are numerous other legal issues related to the Arabellion that are either already on the table or will emerge with time in the course of the political developments. Security is a key concern for any company active in the region, especially in countries such as Libya, Syria and Iraq (not to mention Yemen, a no-go country for international companies for many years already). Many companies feel compelled to hire bodyguards and security providing companies. To do business under such conditions raises a number of intricate legal questions about the regulatory framework for security services, especially in areas where state control has effectively ceased. Another legal topic relates to the conclusion of oil contracts with others, like sovereign states, a topic that is already of current importance regarding such contracts with the government of the more or less autonomous “Kurdistan” in Erbil, for example, and in future also become relevant with respect to Libya, Iraq or Syria, where such contracts might have to be concluded with non-state actors like tribal leaders, militia leaders or—not to be ruled out entirely—a governing body in the self-proclaimed Caliphate of IS in current regions of Syria and Iraq. Legal topics related to state succession might be another issue as well. Given the situation in Syria, Iraq, Libya or Yemen, the map of the new Middle East may ultimately come to look distinctively different from what we have today. Any business lawyer dealing with the region is well advised to be prepared for the fact that states will disintegrate, that new states will emerge, that borders will change and to accordingly prepare a legal scenario for the effects this would have on international agreements and contracts with government or with private counterparts. Finally, sanctions are a longstanding reality when doing business with some countries in the Middle East; actual examples are Iran, Syria and Libya. Compliance lawyers have to concern themselves with the question as to how sanctions can affect contracts and corporate compliance and deal with the different layers of supranational, international and national bodies imposing trade restrictions.


The upheavals in the Middle East in recent years have accentuated or initiated a host of issues of public law or civil and commercial law, issues that require the utmost care and diligence in order to navigate safely and successfully through a region that nevertheless is and will continue to be an important market for German and international business. Business associations such as the German Chambers of Industry and Commerce abroad (AHK) can—due to its location in the region and its knowledge of the political, economic and legal framework, and its valuable connections and links—be a useful partner for companies as well as their legal counsels and attorneys in doing business in this new Middle East.

Editor’s note: In early summer 2015, the AHK in UAE is planning and organizing a legal conference in Germany in order to further explore these topics in-depth and to discuss and provide practical solutions. Legal counsels and attorneys are invited to share their experience and knowledge at the above mentioned conference and are kindly requested to contact AHK


anne.paul@ahkuae. com


8 replies on “Legal implications of the “Arabellion””

Comments are closed.

Aktuelle Beiträge